What A Straight Forward, Non-Jargony Term Sheet From A VC Looks Like

If you're an entrepreneur who's just been given a term sheet by a
venture capitalist, the jargon is probably hard to decipher
without a lawyer. Many founders have signed terms that weren't in
their best interest because they missed a sneaky clause.

Passion Capital, a
London-based firm, has always had downloadable term sheets
available on its site but today it's doing away with all of the
confusing terminology. It's uploaded a version that's written in
plain English.

"It occurred to us that since all VC term sheets are non-binding
anyway – and make a pretty big deal stating that – then there
shouldn't be any reason for them not to be worded in plain,
conversational English," Eileen Burbidge, Passion Capital
partner, told us via email. "It all just pointed to one extra
needless step -- full of formality -- that we were glad to get
rid of."

The term sheet can be downloaded on Passion Capital's website,
but we've also included the full text below:

We’re making you an offer of a £ [ ] investment as your
seed round. This investment will be for [ ] % of the ownership in
your company. Your company will issue to us the same type of
common shares that you already have.

Option Pool

Our offer assumes that you’ve already or will set up an employee
stock option pool before our money goes in, so that our ownership
is "fully-diluted" after accounting for that option pool. We
think you'll need at least a 10% option pool after the investment
round in order to hire some key management team members and
senior people. To make this really clear, see the attached table
to see how this looks with actual shareholding and ownership
percentages after the investment.

Conditions to Close

Before we sign the paperwork and transfer our money, we have to
do some basic due diligence on the company and also on you, the
founders. This includes anti-money laundering checks and having
you complete a Founder’s Questionnaire. We also want to see that
all of the company's relevant employees and freelancers have
signed employment or similar contracts which make it clear that
the company owns all of the intellectual property that’s been
created for the business you’re building.

At the same time, if you haven’t already done so, you should also
do a bit of due diligence on us. For example, speak to some of
our existing founders and get a feel for what they think of us.
We’d be glad to make introductions if it helps.

Estimated Closing Date

We’ll use our standard legal agreements which you should review,
preferably with a lawyer to help (and again, maybe also speak to
a couple of founders who will have seen and agreed to the same
docs). We hope that we can wrap this all up and finish the
investment round with signed paperwork and money in your account
no later than 4 weeks from today, [date].

Documentation and Warranties

It’s worth mentioning that our standard investment docs will
include some “representations and warranties”. These are
assurances that you give to us that the business we’re investing
in is what you say it is. Normally investors have the right to
financial claims against the founders if they’ve misrepresented
the business, but we limit our right to claim so that it’s only
against the company, not the founders, and the amount can’t be
more than the amount we’re investing.

Liquidation Preference

We’re not asking for any complex preference rights (see pointers
here http://bit.ly/128FxX2 and here http://bit.ly/1bR0efR), but we do ask for a
so-called simple 1x liquidation preference. This means that if
the company is sold, we’ll get the higher of either the amount of
our investment or our ownership percentage of the sale value. In
the worst case if the company is wound down with very little
left, then anything left would be distributed to us in proportion
to our ownership.

Important Decisions

We’re here to support you, not to interfere in your day-to-day
business operations, but we do have a list of decisions that we
believe should be approved by a majority of the investors. This
includes issuing new shares, raising new finance, selling the
business, etc. You can see the full list http://swipe.to/1472.

Pre-emption Rights

We think all shareholders, including the founders, should have
the right to invest in future financing rounds to avoid being
diluted. This doesn’t mean shareholders have to put more money
in, but if they want to and are able to, they have that right to
maintain their ownership in any future funding round.

Right of First Refusal and Co-Sale

If any shareholder wants to sell their shares to someone else, we
and other investors have the option to buy those shares on the
same terms or to sell our own shares, again on the same
terms.

Drag-Along

If shareholders, which of course includes you, owning more than
50% of the shares in the company want to sell their shares
(typically to accept an acquisition offer) then, as long as the
board and a majority of the investors approve it, all other
shareholders must also sell their shares. This protects all
shareholders from, say, one small, stubborn shareholder refusing
to sell their shares in an acquisition offer and blocking a deal
everyone else wants to see happen.

Restrictive Covenants

We don’t want any of you to start a competitive business or to
leave and take team members with you to another business even if
it’s not competitive. That’s not why we are investing in the
company and your co-founders wouldn’t be very happy with you
either. These restrictions apply for as long as you’re employed
by the company or hold at least 10% in equity and for 1 year
after that.

Founder Shares

Even after our investment, you the founders will normally own the
majority of the shares in the company. However, our nightmare
scenario is that we invest and then the day after you skip off to
Timbuktu and we’re stuck as shareholders. It may sound
far-fetched, but it happens. We are fundamentally investing in
you and your co-founders for the long haul and we expect you to
have the same view. Making your shares subject to reverse vesting
protects us and your co-founders if one of you changes your
mind. Your shares will be earned monthly over 3 years
meaning, for example, that if you give up on the team after 12
months, the company has the right to buy back two-thirds of your
shares from you.

Board of Directors

We think you should control your board, but we generally like to
have a seat too. We don’t take board control. Sometimes it makes
sense for us just to have a less formal observer, non-voting
seat.

Information Rights

We’d like to get regular status updates from you in whatever
format makes most sense for us all. For our own fund
reporting purposes we’ll need monthly financial reports from
you.

Expenses

You pay for your legal costs and we pay ours. We don't see why
we’d invest cash in your business only for some of it to come
straight back out in order to pay our legal bills. We see
whatever this deal costs us as our cost of doing business.

Exclusivity

If we both sign this term sheet, it means we’ll all be putting
time and effort into completing the investment over the next 4
weeks. We don't want you to keep pitching to other investors
potentially to replace us during that period. If you decide to
switch to another investor in that period and it's not because
we've done anything wrong, then we might charge you for our
costs.

Confidentiality

We trust your judgement in deciding who to talk to about this
offer and when. This is a non-binding offer and things can
unfortunately always fall through, so it's really not in your
interest nor ours to pre-announce anything until it's done.

Non-binding Effect

This document isn't legally binding but we're still pretty
excited about it and the prospect of working with you.

Expiry

We hope you’ll decide relatively quickly on whether or not you
want to move ahead with us. Obviously it's a big decision so
don't take it lightly, but time is your most valuable asset right
now and the quicker we move forward and get cash into the
company, the quicker you’ll be able to focus on building a great
business. This offer remains open until we email you to tell you
that we've moved on.

Acceptance

If you’re happy with all of this, sign below, or just tell us so
in an email reply.